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Why do companies launch IPO and go public

10 Mins 13 Feb 2023 0 COMMENT

Over the past few years, initial public offerings (IPO) have gained massive popularity. Many new investors and market participants are often intrigued and curious about investing in IPOs. An IPO provides retail investors with the opportunity to invest in a company at the early stages of its growth cycle. At the same time, companies also benefit from getting listed on a stock exchange after an IPO. As an investor, it is critical to know why do companies go public.

Why Companies Go Public

Capital, or money, is extremely important for not only starting a business but also operating and scaling it. Typically, the funds are invested by the initial investors like founders, friends, family and private investors. As a business grows, the operational cash flow requirement increases too, and a company needs to raise funds.

A company can raise funds from several sources like private investors or bank loans, but many companies choose to go public because of the multiple benefits that they can get from launching an IPO. By going public, a company’s shares are sold to the general public in exchange for funds. This means that a company is selling its ownership stake to raise funds.

Why do companies launch an IPO?

A company receives several benefits by launching an IPO. Here are some of the reasons why a company launches an IPO.

Raise large-capital

One of the main reasons for launching an IPO is to raise funds. A company requires funds for various purposes like financing a new project, repaying loans, expansion of the business, or even giving an exit to early investors. The capital requirement increases as the company increases in size. It is not easy to raise a large sum of money through private investors or banks and that’s where an IPO helps. By offering the shares for sale to the public, a company can raise a large amount of money.

Better public image

A company launches an IPO as it can help them better its public image. To launch an IPO, a company must adhere to several regulatory and capital requirements. This brings transparency into the company’s financials and operations which enhances its credibility. Moreover, an IPO needs to be marketed publicly, leading to increased awareness and visibility of the company.

Exit opportunity for investors

The initial investors of a company get a chance to sell some or all of their stake to the public in an IPO. An IPO can also be a pure-play Offer For Sale (OFS), wherein the initial investors or promoters dilute their stake to the general public. In such cases, the company does not receive any funds from the IPO, instead, the funds go to the selling shareholders.

Share liquidity

Trading or transacting equity in a private company can be difficult. After launching an IPO, a company’s shares get listed on stock exchanges which then are easily tradable. This increases the liquidity of the shares and allows anyone to easily buy or sell the shares.

Transparency

A company launches an IPO to increase the trust of its stakeholders by being transparent.

When a company launches an IPO and goes public, it must follow a set of disclosure guidelines laid down by the market regulator Securities & Exchange Board of India (SEBI). It needs to make public financial reports, investments, decisions taken during board meetings, press releases, etc. This brings transparency in operations which helps gain the trust of stakeholders.

Importance of an IPO

An IPO holds great importance for businesses as well as investors:

  • Companies go public through an IPO. This allows the shares to be listed and traded on the stock exchanges. The share price is determined by the market forces which helps in better price discovery.
  • Investors get to invest in the early stages of a company’s growth cycle and can benefit from the listing gains of an IPO or stay invested for longer if they believe the company has the potential to grow.
  • The fund raised through an IPO is equity capital, which is owners’ capital. This helps save money on high-interest payments that the company might have to pay on the debt capital.
  • Investing in an IPO gives investors a part ownership stake in the company. This entitles the investor to claim dividends and vote on matters related to the business.

With new IPOs flooding the markets each year, an investor should be informed and know why a company goes public. Subscribing for an IPO has several benefits but an investor should do their own research and analysis before investing in an IPO.

FAQs

Why would a company want to go public?

A company would want to go public to raise funds, have better liquidity and marketability of shares and benefit from a better public image and awareness of the company.

Is it better to be acquired or go public?

A company can benefit from going public and still have control over the business. The increase in the value of shares can benefit the initial shareholders and owners which might not be possible if the company is acquired.

Why do some companies choose not to go public?

In order to retain control of the business and avoid additional costs, some companies might choose not to go for an IPO.

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